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Renting for life?
Old 05-29-2010, 06:37 AM   #1
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Renting for life?

Hi all, this is my first post.

I'm an American currently working in Japan and am planning to retire back in the US someday.

I always thought I would buy a house in the US, rent it out till we retire, and move in later and finish paying it off. But recently, I read William Bernstein's and Ramit Sethi's books, and they have both suggested renting instead of owning, and that the stock market (index funds) is a much better place to put your money.

This idea appeals to me as I couldn't manage the property myself and I know most property managers charge 10% of the rent. Putting everything in our Vanguard account would be simple and stress-free.

Then again, it appears that if we are going to buy, now is the time, with reasonable prices and low mortgage rates.

Is there a way to make a reasonable guess as to how much rent will increase in the future and to compare that with the cost of ownership over a given period of time?

How did you guys make the decision to rent or buy?
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Old 05-29-2010, 09:27 AM   #2
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Our decision to buy was very simple - the cost of buying was less than the cost of renting at the time.

While stocks may or may not be a better investment than property, given that most people end up with a high proportion of their assets in bonds when they retire, the combination of a variable expenses which may rise with inflation and a fixed income which does not rise with inflation could be problematic over time. (And yes, I know that you can buy TIPS or similar in some countries but not in all places.)
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Old 05-29-2010, 10:26 AM   #3
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Personally, I have had such miserable experiences with home ownership that I plan to rent for the rest of my life. YMMV.
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Old 05-29-2010, 10:31 AM   #4
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IMHO the main drivers of the rent/buy decision are not financial. Difficult to quantify things like no adjoining walls, the ability to modify as you like, and the sense of self-determination are just as important as inflation hedges or rent/cost ratios.

Then there are times like the recent past and its reverberations into today when the housing market gets so out of whack that it all becomes a crap shoot. Unfortuately, you can't dollar average into a house.
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Old 05-29-2010, 10:32 AM   #5
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If my wife winds up entering the ministry, the current house we own is likely the last home we'll ever own until we both retire.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 05-29-2010, 10:35 AM   #6
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Personally, I have had such miserable experiences with home ownership that I plan to rent for the rest of my life. YMMV.
I saw my parents' miserable experiences with home ownership and have never wanted to own myself.

-- CuppaJoe in the apt. at the top of the stairs

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Welcome, Kmoeini, what do you teach?
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Old 05-29-2010, 10:47 AM   #7
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If your city has rent control and you can get sheltered by that, rent. If you live anywhere in the mid-west, Southwest or other places where housing demand is quickly met by new construction, rent unless as it sometimes is, buying is cheaper all in. But if you live in a big city where new construction is constrained by space or rules or whatever, consider buying. This last is my situation, and although I am a natural renter by inclination I may well buy if I find something I want to commit to.

Apartment buildings are different socially than condominium or co-op buildings. I have met a lot of people just by living here in my apartment building, and some of them have become my friends. Renters in a cool building seem to have more of an attitude like inhabitants of a college dorm than like owners jealously guarding their castle, which is the vibe I sometimes get when chatting up people in condo buildings. It all depends on where you feel comfortable.

Ha
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Old 05-29-2010, 11:28 AM   #8
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We bought many years ago in a city center and plan to stay put, at least for now. So our decision is made - own. But if we were to sell the house and move we would almost undoubtedly rent. In addition to financial factors, flexibility would be a big factor. Buying only makes sense if you know the area well and plan to stay a long time. If you rent it is relatively easy to move if you conclude that you chose the wrong area to live.
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Old 05-29-2010, 11:33 AM   #9
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Apartment buildings are different socially than condominium or co-op buildings. I have met a lot of people just by living here in my apartment building, and some of them have become my friends. Renters in a cool building seem to have more of an attitude like inhabitants of a college dorm than like owners jealously guarding their castle, which is the vibe I sometiems get when chatting up people in condo buildings. It all depends on where you feel comfortable.
I think you are on to something here. Owners of other condos in your complex are potential adversaries. Who knows when a group of them are going to decide that they just have to have a 24/7 concierge or on the flip side, decide that landscape care is just too expensive. I know of complexes that decided to fill in their pools to lower insurance. I'll bet that was contentious.
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Old 05-29-2010, 11:50 AM   #10
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So far I have been a renter (I'm 34). I also have very few possessions. Other than my car, the rest of my belongings would maybe fetch $2,000 if I sold it all. I put pretty much every penny into investments (401k, roth ira, and my taxable account).

I think it has worked out pretty well so far. I am a lot more financially secure than most people. I've got a year's worth of living expenses in cash ($30k) and low six figures in stocks in my taxable account which bring in roughly $4k a year in stock divs. That's enough to pay for two months living expenses. I believe that by the time I am 40 I will have $10k in div income from my taxable account. I will be pretty invincible economically at that point.

Renting has probably saved me money because I have no desire to buy nice furniture while living in an apt. I try to minimize what I own because I know that the more I own the more hassle I will have when I move. I can definitely say for a fact that being a renter frees up a lot of time. I have no yard work and all repairs get done by my apt complex.

I would like to own a house one day, but not in the city that I currently live in. Probably not in this state either. So, I am going to keep renting and building up my investments until I get to a secure enough position that I can move wherever I want regardless of the job opportunities. I plan on working part-time "forever", but it may be minimum wage work once I move. I want to get to a point where I just need to bring in $10k to $15k a year from w-2 income and my investments can take care of the rest.
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Old 05-29-2010, 01:23 PM   #11
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IMHO the main drivers of the rent/buy decision are not financial. Difficult to quantify things like no adjoining walls, the ability to modify as you like, and the sense of self-determination are just as important as inflation hedges or rent/cost ratios.(snip)
this is certainly true in my case. It really irked me to know that if I rented for thirty years I would in effect have paid for the house, but I wouldn't get to keep it. I desperately wanted to leave the ranks of the renters and join those of the owners, and one of my primary reasons for my move from the Bay Area to Seattle was that at the time, housing was a lot less expensive here. I am glad I bought, because over the years since I was first able to do so, real estate here has appreciated largely. Real estate prices have gone up so much here that if I had waited to buy, I'd eventually have been priced out of the market again, just as I was in San Jose. My mortgage payment now is less than I've seen advertised for rent on a two bedroom apartment a block or two away, and I'm in the process of refinancing, which will reduce it still further. I don't think I'd ever consider retiring as a renter. IMO, it puts housing expense too much at the mercy of your landlord—how could you ever know how much income you need when someone else is controlling one of your major expense categories? But I digress.

But having said that, I think your situation, considering purchase of a property that you won't be occupying yourself at first, is very different from mine. After many years of owning rental properties which they managed themselves, my parents in the last few years have switched to using a management company. They didn't want to sell and take the capital gains hit, which would have been significant—I think they bought their first rental house back in the 1970's or so. I think my mom has said that the building just about pays for itself, but no more than that. Admittedly, this is only one building and one management company, but it shows one possible outcome.

If you did buy a house and rent it, and it basically paid for itself but no more, how would that compare to other ways you might invest the money? What if the house does not appreciate, or even declines in value? What if you change your mind and decide not to return to the US after all? These are among the questions I would ask myself if I were trying to decide what to do in your circumstances.
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Old 05-29-2010, 01:30 PM   #12
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A couple of articles you may want to read
Economic Scene - As Markets Fizzle, Buying May Cost Less Than Renting - NYTimes.com
Retiring and Moving? Where to Buy vs. Rent - WSJ.com
Rent-to-Buy Ratios Improve: Does it Make Sense to Buy Again? - Developments - WSJ

I've heard that if the ratio of the cost of the home to the annual cost to rent is less than 10, you should definitely buy, if greater than 20, you definitely rent. In between, it is could go either way. I can't remember where I got this information from, but I think it was in an article on wsj.com

I believe there is a strong emotional aspect to the decision that should not be ignored.
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Old 05-30-2010, 12:20 AM   #13
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Wow, thanks for all the great responses.

@traineeinvestor That's a great point. I am planning to keep my allocation at 70-75% stocks through retirement.
@Onward Thanks for your response.
@IndependentlyPoor This is an interesting point. I'm sort of fighting the status quo here. My entire family would be aghast at me putting my entire savings in the market at this point. Luckily DW is with me.
@ziggy29 Thanks for your response.
@CuppaJoe I teach English to engineering and biology majors.
@haha Yeah, it's tough. I was considering moving to the University City area in San Diego. It's completely developed. The particular condo we were looking at would cost us $400/mo or so even with 100% occupancy and no repairs. My father, on the other hand, has been buying "desert castles" in Victorville with positive cashflow on each one. He's open to the risks you mentioned, with plenty of cheap undeveloped land out there.
@donheff Thank you. That's very true.
@ESRwannabe That's exactly how I want to live. No clutter or being bogged down with excess crap.
@kyounge1956 Those are all very good questions. The truth is, I don't know if I want to live in San Diego anymore. Most of my friends have moved. My parents are there but I can always visit. Living in San Diego is attractive but housing sure is expensive. I could probably retire a few years sooner if I choose to live somewhere else.
@walkinwood Thanks, those articles were very informative.
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Old 05-30-2010, 08:48 AM   #14
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Certainly it depends on where you live but there are such good deals out there now and interest rates are so low you would be hard pressed to find a better time to buy a house then now. You can get a nice 3BR house in the Phoenix area for $125k, that would have gone for $300k a few years ago. Many other hard pressed areas have similar deals. You could lock yourself in to a $650/month mortgage for 30 years and gain some equity or pay rent money for the rest of your life. You would be hard pressed to find a place to rent for that today, one can only imagine what you'll be paying in rent 30 years from now.
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Old 05-30-2010, 09:17 AM   #15
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Certainly it depends on where you live but there are such good deals out there now and interest rates are so low you would be hard pressed to find a better time to buy a house then now. You can get a nice 3BR house in the Phoenix area for $125k, that would have gone for $300k a few years ago. Many other hard pressed areas have similar deals. You could lock yourself in to a $650/month mortgage for 30 years and gain some equity or pay rent money for the rest of your life. You would be hard pressed to find a place to rent for that today, one can only imagine what you'll be paying in rent 30 years from now.
Under circumstances like this, it would certainly be more worthwhile to buy. Especially if you were retired or in a job that was stable and planned to stay in the home for a goodly number of years. You couldn't rent a nice house in a desirable neighborhood here in western PA for $650.00. It would be more like $1500-2000 per month where I live even in this slow real estate market.
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Old 05-30-2010, 09:50 AM   #16
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I'm looking at areas that definitely are worth more to buy than to rent (Florida, Arizona major cities), but this hasn't been mentioned: I like buying, because then I am able to add bookshelves, paint or wallpaper, landscape and do anything else I want to to the place. I feel tremendously stifled creatively when I rent.

However, Haha has a good point in that apartment dwellers DO seem friendlier than condo or house owners who are guarding their territory and probably view others there as potential threats. Glad he mentioned that. Wouldn't have thought of it, but he is surely right on that point to me.
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Old 05-30-2010, 10:51 AM   #17
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How did you guys make the decision to rent or buy?
It depended on the conditions at the time.

In our early years of marriage (e.g. dirt poor) we rented apartments, mobile homes (trailers), etc. Whatever we could afford, regardless of our desires of living conditions.

As we grew older and more financially stable, we changed to ownership of similar living arrangements (yes, our first "home" was a trailer - but at least it was ours), along with "shared walls" (e.g. townhome ownership).

It wasn’t till the last two single homes we owned (over 30+ years) that we know that we are not folks that want to share anything.

In our early 60's (I'm retired, my wife will soon be), our current home with a bit of an acre for the dogs to run, is what we feel fits our "desired" lifestyle, at this time of our life. I use the word "desired", since we are not limited to a certain type of home, based upon financial consideration.

But that's just us. We judge lifestyle over what may/may not be the best thing financially (and that depends on your personal view of the own/rent argument).

It's not an easy decision, but all I'll add is if your home decision is depending on what you want as far as lifestyle, neither buy/own comes in to the decision (those are just financial considerations, not "quality of life", which I consider most important)....
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Old 05-30-2010, 11:22 AM   #18
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Would anyone else consider renting as a lifestyle choice? We paint walls and install bookshelves in our rental. It is assumed that we will pay to restore the place when we leave. So far, we have been there for 13 years.

It is a penthouse with concrete walls and floors. The one common wall is between master bedrooms. The only sounds from below are when they drag furniture around.
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Old 05-30-2010, 11:29 AM   #19
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Hi all, this is my first post.

I'm an American currently working in Japan and am planning to retire back in the US someday.

I always thought I would buy a house in the US, rent it out till we retire, and move in later and finish paying it off. But recently, I read William Bernstein's and Ramit Sethi's books, and they have both suggested renting instead of owning, and that the stock market (index funds) is a much better place to put your money.

This idea appeals to me as I couldn't manage the property myself and I know most property managers charge 10% of the rent. Putting everything in our Vanguard account would be simple and stress-free.

Then again, it appears that if we are going to buy, now is the time, with reasonable prices and low mortgage rates.

Is there a way to make a reasonable guess as to how much rent will increase in the future and to compare that with the cost of ownership over a given period of time?

How did you guys make the decision to rent or buy?
The hassles and expense of being an absentee landlord are not something that I would voluntarily endure. Also, there is no way to know whether or not you would prefer the same location once you are ready to actually live in the house. We never know what life will bring to you between now and then. Purchase prices for homes may be low right now, but the other side of that coin is that it can take a very long time to sell one's house, in some locations. This can lead to situations that are worse than inconvenient.

When I decided to buy my present house I knew that I was stuck here for years, until I could qualify for retirement from my job. Plus, the mortgage payments on my three bedroom house were less than the rent on a two bedroom apartment. Finally, my monthly retirement expenses would be less if I was living in a paid off house. These are the reasons why I bought my house.

Right now we would not be living in Louisiana if we had the mobility of those who rent.
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Old 05-30-2010, 11:39 AM   #20
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If you are going to stay......and it will be your HOME for this point forward.... to heck with the financial part of this.... you can't replace certain things in your life with a financial outlook (gasp, will the money Gods stick me down!!).
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